Operating Results						Third quarter 2023 compared to second quarter 2023 Reported Results: •Net income (loss): $2.3 million compared to $(31.4) million •Earnings (loss) per fully diluted share: $0.12 compared to $(1.67) •Return on Average Equity ("ROAE"): 1.7% compared to (21.7)% •Return on Average Assets ("ROAA"): 0.10% compared to (1.32)% •Net interest margin: 1.74% compared to 1.93% •Efficiency ratio: 98.3% compared to 93.7%
						Core Results:(1) •Net income: $2.3 million compared to $3.2 million •Earnings per fully diluted share: $0.12 compared to $0.17 •Return on Average Tangible Equity ("ROATE"): 2.2% compared to 2.9% •Return on Average Assets ("ROAA"): 0.10% compared to 0.13%

Financial Position						As of and for the quarter ended September 30, 2023 •Uninsured deposits were $535 million, or 8% of total deposits •Excluding brokered deposits, total deposits decreased $137 million •Loans held for investment ("LHFI"), remained stable •Nonperforming assets to total assets: 0.42% •Allowance for credit losses to LHFI: 0.55% •Book value per share: $26.74 •Tangible book value per share: $26.18

“The deposit outflows we have experienced in 2023 were primarily due to depositors seeking higher yields and seasonal tax payments,” Mr. Mason stated. “With noninterest-bearing and low-cost deposits seeking higher yields, we have implemented a strategy to attract new deposits and retain existing deposits through promotional rate certificates of deposit accounts and money market accounts."

(1)Core net income, return on average tangible equity, core return on average assets, and the efficiency ratio are non-GAAP financial measures. For a reconciliation of core net income, core return on average assets and return on average tangible equity to the nearest comparable GAAP financial measure and the computation of the efficiency ratio see “Non-GAAP Financial Measures” in this earnings release.

(1)Tangible book value per share and tangible common equity to tangible assets are non-GAAP financial measures. For a reconciliation to the nearest comparable GAAP financial measure, see “Non-GAAP Financial Measures” in this earnings release.

(2)This ratio excludes balances insured by the FHA or guaranteed by the VA or SBA.

(3)Regulatory capital ratios at September 30, 2023 are preliminary.

 

During the second quarter of 2023, the non-core item is a $39.9 million goodwill impairment charge.

Our net income (loss) and income (loss) before taxes were $2.3 million and $1.4 million, respectively, in the third quarter of 2023, as compared to $(31.4) million and $(36.6) million, respectively, in the second quarter of 2023. Our core net income and core income before taxes in the third quarter of 2023 were $2.3 million and $1.4 million, respectively, as compared to $3.2 million and $3.2 million, respectively, in the second quarter of 2023, which excludes the impact of the goodwill impairment charge. The $1.8 million decrease in core income before taxes was due to lower net interest income which was partially offset by a larger recovery of allowance for credit losses and lower noninterest expense.

The income tax benefit realized in the third quarter of 2023 was due to the recognition of return to accrual differences related to tax exempt income. Our effective tax rate for the second quarter of 2023 of 14.2% was significantly impacted by the goodwill impairment charge, a portion of which was not deductible for tax purposes. Our core income effective tax rate for the second quarter of 2023 was 1.6%, which is lower than our statutory tax rate of 24.7% primarily due to the significantly higher proportion of tax exempt revenues in comparison to our overall core income before tax.

Our net interest income in the third quarter of 2023 was $4.6 million lower than the second quarter of 2023 due to a decrease in our net interest margin from 1.93% to 1.74%. The decrease in our net interest margin was due to a 25 basis point increase in the cost of interest-bearing liabilities caused in part by an increase in the proportion of higher cost borrowings to the total balance of interest-bearing liabilities. The increase in the cost of interest-bearing liabilities was due to overall higher deposit, long term debt and borrowing costs. During the third quarter, the cost of deposits increased 4 basis points during the third quarter, the cost of long term debt increased 15 basis points and the cost of borrowings increased 19 basis points. The increases in the rates paid on interest-bearing liabilities were due to the significant increases in market interest rates during 2023.

A $1.1 million recovery of our allowance for credit losses was recognized during the third quarter of 2023 compared to a $0.4 million recovery of our allowance for credit losses in the second quarter of 2023. The recovery for the third quarter of 2023 was primarily due to reduced levels of higher risk land and development loans which resulted in lower expected losses. The recovery in the second quarter of 2023 reflects a decrease in our unfunded commitment reserve as our allowance for credit losses remained unchanged at $41.5 million and our net charge-offs realized in the quarter were nominal.

Noninterest income in the third quarter of 2023 was consistent with the second quarter of 2023.

The $41.7 million decrease in noninterest expenses in the third quarter of 2023, as compared to the second quarter of 2023 was primarily due to a $39.9 million goodwill impairment charge in the second quarter of 2023.

During the nine months ended September 30, 2023, the non-core item is a $39.9 million goodwill impairment charge.

Our net income (loss) and income (loss) before taxes were $(24.1) million and $(28.7) million, respectively, in the nine months ended September 30, 2023, as compared to $58.0 million and $73.5 million, respectively, in the nine months ended September 30, 2022. Our core net income and core income before taxes in the nine months ended September 30, 2023, which excludes the impact of the goodwill impairment charge, was $10.5 million and $11.1 million, as compared to $58.0 million and $73.5 million, respectively, in the nine months ended September 30, 2022. The $62.4 million decrease in core income before taxes was due to a lower net interest income, a lower recovery of provision for credit losses and lower noninterest income, partially offset by lower noninterest expense.

Our effective tax rate of 16.2% during the nine months ended September 30, 2023 was significantly impacted by the goodwill impairment charge, a portion of which was not deductible for tax purposes. Our core income effective tax rate for the first nine months of 2023 and 2022 was 5.2% and 21.1% respectively, which is lower than our statutory tax rate of 24.7% and 25.3%, respectively, primarily due to the significantly higher proportion of tax exempt revenues in comparison to our overall core income before tax. Our effective tax rate in the nine months ended September 30, 2022 was also lower than the statutory rate due to the benefits of tax advantaged investments and reductions in taxes on income related to excess tax benefits resulting from the vesting of stock awards during the period.

Net interest income for the nine months ended September 30, 2023 decreased $45.9 million as compared to the nine months ended September 30, 2022 due primarily to a decrease in our net interest margin partially offset by increases in the average balance of interest earning assets. The increase in interest-earning assets was due to loan originations and purchases of investment securities during 2022. Our net interest margin decreased from 3.17% in the nine months ended September 30, 2022 to 1.96% in the nine months ended September 30, 2023 due to a 226 basis point increase in the rates paid on interest-bearing liabilities which was partially offset by a 68 basis point increase in the yield on interest earning assets. Yields on interest-earning assets increased as the yields on loan originations during the last two years were higher than the rates of our existing portfolio of loans and yields on adjustable rate loans increased due to increases in the indexes on which their pricing is based. The higher yields on our investment securities were primarily due to adjustments to yields realized from longer estimated lives of certain securities and the yields of securities purchased during the past year being higher than the yields on our existing portfolio. The increase in the rates paid on our interest-bearing liabilities was due to higher deposit costs, higher borrowing costs and an increase in the proportion of higher cost borrowings used as our sources of funding. The increases in the rates paid on deposits were due to the significant increase in market interest rates over the prior year and the decrease in the proportion of noninterest-bearing deposits to total deposits. Our average borrowings increased by $886 million to fund the growth of our loan portfolio and investment securities. Our cost of borrowings increased from 199 basis points during the nine months ended September 30, 2022 to 469 basis points during the nine months ended September 30, 2023 due to the significant increase in market interest rates during the last two years.

A $0.9 million recovery of our allowance for credit losses was recognized during the nine months ended September 30, 2023 compared to a $9.0 million recovery of our allowance for credit losses in the nine months ended September 30, 2022. The recovery of our allowance for credit losses in 2023 was the result of economic conditions performing better than expected, improved single-family collateral forecasts, changes in portfolio composition and a decrease in our unfunded commitment reserve offset slightly by deteriorated commercial collateral conditions. The recovery of our allowance for credit losses in 2022 was the result of the favorable performance of our loan portfolio, a stable low level of nonperforming assets and an improved outlook of the estimated impact of COVID-19 on our loan portfolio.

The decrease in noninterest income for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022 was due to a decrease in gain on loan origination and sale activities and other income, which was partially offset by higher deposit fees. The $9.0 million decrease in gain on loan origination and sale activities was due to a $5.2 million decrease in single family gain on loan origination and sale activities and a $3.7 million decrease in commercial real estate and commercial and industrial gain on loan origination and sale activities. The decrease in single family gain on loan origination and sale activities was due to a decrease in rate lock volume as a result of the effects of increasing mortgage interest rates. The decrease in commercial real estate and commercial and industrial gain on loan origination and sale activities was primarily due to an 87% decrease in loans sold volume as a result of increasing interest rates. The $2.9 million decrease in other income was primarily due to a $4.3 million gain on sale of branches realized in the nine months ended September 30, 2022. The $1.3 million increase in deposit fee income was primarily due to higher early withdrawals fees.

The $37.4 million increase in noninterest expenses in the nine months ended September 30, 2023 as compared to nine months ended September 30, 2022 was due to a $39.9 million goodwill impairment charge and higher general, administrative and other costs which were partially offset by lower compensation and benefit costs and occupancy costs. The $5.5 million decrease in compensation and benefit costs was primarily due to reduced commission expense on lower loan origination volumes in our single family mortgage operations, lower staffing levels and lower bonus expense, which were partially offset by wage increases given in the first nine months of 2023 and a reduction in deferred costs due to lower levels of loan production. The increase in general, administrative and other costs was primarily due to higher FDIC fees due to our larger asset base, which were partially offset by a reduction in legal fees due to charges related to nonrecurring costs expended on litigation activities and legal matters in the nine months ended September 30, 2022.

During the nine months ended September 30, 2023, our total assets increased $94 million due primarily to a $154 million increase in cash. Loans held for investment were relatively unchanged as $1.0 billion of originations was offset by prepayments and scheduled payments of $1.0 billion. During the first nine months of 2023 total liabilities increased $154 million due to an increase in borrowings, partially offset by a decrease in deposits. The $706 million decrease in deposits was due to a $473 million decrease in brokered certificates of deposit and a $1.1 billion decrease in non-certificates of deposit balances which were partially offset by a $455 million increase in certificates of deposit balances related to our promotional products. The decrease in deposits was offset by $373 million in deposits that we acquired as part of the branch acquisition in the first quarter of 2023. The $857 million of additional borrowings were used to replace maturing brokered deposits and increase our on-balance sheet cash balances.

Loans Held for Investment ("LHFI")

(1)Includes $1.2 million, $1.3 million, $5.2 million, $5.9 million and $5.8 million of single family loans that are carried at fair value at September 30, 2023, June 30, 2023, March 31, 2023, December 31, 2022, and September 30, 2022, respectively.

(1)    Includes $17.1 million and $3.4 million, respectively, of consumer loans and commercial and industrial loans purchased in our first quarter 2023 branch acquisition.

During the third quarter, our ratios of nonperforming assets to total assets and total loans delinquent over 30 days, including nonaccrual loans decreased. As of September 30, 2023, our ratio of nonperforming assets to total assets was 0.42%, while our ratio of total loans delinquent over 30 days, including nonaccrual loans, to total loans was 0.64%.

(1) FHA-insured and VA-guaranteed single family loans that are 90 days or more past due are maintained on accrual status if they are determined to have little to no risk of loss.

(2) Includes loans whose repayments are insured by the FHA or guaranteed by the VA or SBA of $10.2 million and $11.3 million at September 30, 2023 and June 30, 2023, respectively.

(1) The ACL rate is calculated excluding balances related to loans that are insured by the FHA or guaranteed by the VA or SBA

(1) May include loans originated as held for investment.

(1)Represents changes due to collection/realization of expected cash flows and curtailments.

(2)Principally reflects changes in model assumptions, including prepayment speed assumptions, which are primarily affected by changes in mortgage interest rates.

(1) Represents changes due to collection/realization of expected cash flows and curtailments.

(2) Principally reflects changes in model assumptions, including prepayment speed assumptions, which are primarily affected by changes in mortgage interest rates.

In this earnings release, we use the following non-GAAP measures: (i) tangible common equity and tangible assets as we believe this information is consistent with the treatment by bank regulatory agencies, which exclude intangible assets from the calculation of capital ratios; (ii) core income and effective tax rate on core income before taxes, which excludes goodwill impairment charges and the related tax impact as we believe this measure is a better comparison to be used for projecting future results and (iii) an efficiency ratio which is the ratio of noninterest expense to the sum of net interest income and noninterest income, excluding certain items of income or expense and excluding taxes incurred and payable to the state of Washington as such taxes are not classified as income taxes and we believe including them in noninterest expense impacts the comparability of our results to those companies whose operations are in states where assessed taxes on business are classified as income taxes.